A Q/A Session

Sir, I am having great difficulty in understanding where shall issuance of loans be written in Cash Flow Statement. In the book it mentions that collection and issuance of loans should be written in the Investing section but then it says that issuance and redemption of long term debts should be written in the Financing section.Arent loans long term debts?

=> I understand your concern. It's easy to misunderstand these concepts. So, read the following carefully. In general, if an activity affects income statement, it is an operating activity; if it affects the long-term assets of a company, it is an investing activity, and if it affects long-term  liabilities and equity, then it is a financing activity.  

Simplistically, the activities related to generation of funds for running a company are financing activities. Once a company has the funds, it may use the funds in investing activities. Read more...

Investing Activity:
1. Purchase and sale of long-term assets.
2. Purchase and sale of instruments (stocks, bonds, etc.) of other companies.
2. Making loans (lending money to an individual or a company) and getting back the principal (NOT the interest, as it is accounted for in the operating activity section) of a loan made earlier.

Financing Activity:
1. Receiving money from owners (by issuing shares) or creditors (by borrowing in form of bonds/notes etc.).
2. Making payments to the owners (in form of dividends) or the creditors (returning the borrowed money e.g. redemption of bonds).
3. Purchase or sale of own shares (also called treasury stock or capital stock).

Sir, I have a question related to chapter 10, FIN254. I am not clear with the question of problem 13. How should I proceed in problem 13? What should be the steps?

=> First you need to calculate annual depreciation expense, then the after tax salvage (as book value at the end of the project would be zero, total salvage value would be the gain and you would need to deduct tax from the gain to get to after tax salvage). Yearly savings of 130,000 is equivalent to pretax earnings [Sales – Costs(without dep. exp)]. You may use the “Tax Shield Approach” to find OCF.

Sir, I am having a confusion in Problem: 14 of Chapter 10.What do we mean by 'reduce working capital by $ 125,000 (this is a one time reduction)'?Where do we place this NWC figure in the calculations?Is it recovered at the end of the project life?

=> This is very much similar to the earlier question (Problem 13). Accepting this project means that we will reduce overall NWC of the firm by $125,000 (remember, incremental cash flow?). This reduction in NWC is a cash inflow for this project at Year 0. This reduction in NWC implies that when the project ends, we will have to increase NWC for the firm again. So, at the end of the project, we will have a cash outflow to restore the NWC to its level before the project. We also must include the aftertax salvage value at the end of the project. 

Sir, you said about Pretax OCF in the class. If I want to calculate OCF, then I have to deduct taxes from the pretax ocf. Is my concept is right sir?

=> You are right! Tax is applied on earnings, not on cash flows. Since we disregard interest expense when evaluating a project, OCF = Net Income + Dep. Exp. = (EBIT - Taxes) + Dep. Exp. So, OCF + Taxes (which is Pretax OCF) = EBIT + Dep. Exp. Now you calculate taxes on EBIT, then deduct taxes from pretax OCF to get OCF.

FIN254 Project Related Questions

Q1: I am not sure of the term 1B:5 of B/R column. Will you please explain it sir?

Ans: 1B:5 means 1 bonus share against 5 shares which is equivalent to 20% bonus share. Similarly 1B:2 would mean 50% bonus share.

Q2: I have a problem with interim dividends. Please tell me how to handle that information.

Ans: You probably noticed some MNCs offering interim dividends. In those cases, you just use the final dividend amount and declaration date, ignore the rest interim dividends for that period.

Q3: Where do we get face value of a stock?

Ans: Get a recent copy of daily newspaper and just turn to Stock columns of Business/Finance section (But make sure previous day was a trading day!). You may also go to DSE website at this link (http://www.dsebd.org/company%20listing.php). Clicking on the link for your stock will take you to a window where you will find not only the face value of the stock, but also, a lot more other information regarding that stock. Alternatively, you may choose to buy a DSE monthly review where face value of all the stocks listed with DSE is available.

Q4: Sir, if 1B:5 is 20% bonus issue.Then how do we calculate the bonus % for 1B:7 and 1B:14?The percentages are in decimals; however when the value is filled in the dividend cell it is automatically converted to a whole number, for e.g it changes from 14.28% to14%. Is this correct?

Ans: You are correct. 1B:7 and 1B:14 are equivalent to 14.29% and 7.14%. Don't bother about the auto-rounding. Formula will take decimals into consideration.

Q5: I have problem in BIFC which has no dividends. In analysis it shows invalid & has no first issue price. Where do I put the begining value? 

Ans: Please look at the dividend file carefully. BIFC announced following dividends
Cash Dividend of 15% on 15-04-07 and
Cash 10% & Stock 10%B on 09.04.2008.

Moreover, BIFC was listed with DSE in November 2006. So, you will not get any trading information before that. In the first table you will have no values from 2001 to 2005. Replace "End of Dec, 2005" by "15-Nov-08" (as it is the first trading day for BIFC) and put closing price of that date which is 189.75 (you can get it from CP_2006.xls file). Then put the three closing price values under that accordingly.

For the Analysis worksheet: As this stock started trading from 2006, you need to put the initial investment amount of 1,00,000 in 2006 (Cell No. B9), not earlier. Hope you will be able to get this right. And please remember to calculate the investment period accordingly (in this case from Nov-06 to Jun-08, there are 20 months, so the investment period would be =20/12).

Q5: Sir, if the 3rd month from the dividend declared is after June 2008, then should I record this whole dividend or I assign zero to the closing price of 3RDM.

Ans: You may leave it blank. Please DO NOT assign zero, because it would be a wrong information.

Q6: Sir, I am having some problem with the project.  For Desh Garments last CP given is of 14-12-02. Should I take it as the end CP of DEC 2002?

Ans: Yes, you are correct. End of Dec closing price of a script in any year does not neccessarily mean trading on the last day of December of that year. Your project requires you to pick the last closing price in a particular year. If a particular script was last traded on the 14th of Dec in 2002, then let it be. Use that to be the Year-end closing price. You may even find a script which was not at all traded in the month of December. In that case, the Year-end closing price might be the closing price of last trading day, even if it was in Nov or earlier. Just replace "End of Dec, 2002" by "End of 2002".

Q7: Sir, if any company's beginning price for jan 1, 2001 is not given and the beginning price is on jan 10 or jan 12 then what is the investment period? will I calculate by month or day?

Ans: If you want to be precise, you may consider the fractional monthly period (for example, taking 2/3 of the month if trading date is on the 11th). Otherwise, you may include that whole month if the date is in the first half of the month or you may exclude that month if the date is around the end of the month.

Q8: Sir, Do I include D.A.D(9/17/2001), Cash (0), 3RDM(Dec)? Face value is the face value of a single share or a lot?

Ans: For a zero/nil cash dividend, you don't need to put close price of the 3rd month. Face value is the par/stated value of any single instrument.

Q9: Sir, I have seen the company listing information of UCBL on the DSE Website and it shows that they have declared a 30% Bonus issue for 2001 but I cannot find the declare date any where for it. So, I could not include the 30% bonus issue in the excel file for UCBL without that date.

Ans: The declaration date is right there in the dividend file! It's 30%B (2001) announcment date 05.08.2007. I don't know why/how you missed it! Announcement date is not important in case of stock dividend for our project. However, it's important for cash dividend.

Q10: Are we just required to comment on the cumm. and average return for the various companies in the word file? Do I mail you both the excel and the word file (softcopies) only?

Ans: Exactly! You are required to discuss the findings and compare stock performances in the word file. You should email me six files: five excel files (one for each stock) and one word file with the discussion.

Q11: For Islamibank (the one that you sent as sample), you have given 1000 as facevalue, but the website of DSE is showing facevalue of 100 and market lot of 10. so, should we multiply the facevalue with market lot and get the final facevalue?

Ans: This is because of a very recent stock split. It used to have a face value of Tk. 1000 per share and 1 share per market lot. The split ratio was 1:10 (old:new) and market lot of 10 shares. The record date for the split was 27th November, 2008! Thus, the new face value of Islami Bank is in fact Tk. 100.

Q12: What do "1B:4,1R:2", "5%(1B:20)" and "35%B,1R:2" mean? I know what individually 1B:4 means and what 30%B means, but i don't know what the "R" term means and how to interpert them toghether.

Ans: They mean the same thing together. For example, "1B:4,1R:2" means 1 bonus share against 4 shares (or 25% bonus share) and 1 right share for 2 shares (or 50% right share). When the companies announce this type of declation, they also announce different record dates for bonus and right shares to be effective. To learn more you may browse through the news section of DSE website.

Q13: What do you think about my stock .........? I am having this type of problem with it? What to do with it?

Ans: Please don't use the blog to ask me specific share related problem. In that case, email me directly. It's not practical to post solutions to hundreds of such individual stock related problems here. Hope you would understand. Thank you.

FIN254: Project

Following link will take you to the project folder. You may download all necessary files (daily price quotation, month-end price quotation, dividend information from January 2001 to Jun 2008 of all shares listed with Dhaka Stock Exchange (DSE), excel data analysis template, word report template etc.) from there. Please use the Template.xls for individual stock evaluation. Rename the excel file using stock ticker followed by your id number. You would have to create five such excel files for 5 stocks assigned to you and a word file (maximum length: two pages) where you would talk about your findings. Please rename the word file to your id number. You may submit your project by sending the softcopies (five excel files and a word file).

Project Folder

After renaming the template.xls file, insert necessary data in the yellow shaded cells. Fill out the first table using close price files. For the shares that were enlisted with DSE after Jan 2001, use data from the time of enlistment and leave the prior cells empty. Use Div_DSE.xls file to fill out the second table. If you fill out all yellow shaded cells, Cumulative Return and Average Periodic Return would automatically be calculated. Use them in the word template file to write about your findings.

Use both of my email addresses: imran.edu@gmail.com and imran@northsouth.edu to send the softcopies. The subject of your email should be like this... FIN254 Project: your name, id, & section. I will send you an acknowledgement email after receiving your files. If you don't get the confirmation, then try again. Project submission due date is 14th of December, 2008 (Sunday). You may of course send your files earlier. Further details would be discussed in class. If you have any question then you may see me at my office or send an email.

Please READ the above instructions carefully before sending your project as email attachments. Check your work carefully before sending it to me. I would not be able to accept a modified version second time.  Thanks.

Final Exam Schedule!

Dear students:

The final exam schedule for Fall 2008 has been published by the registrar's office.

ACT201 => 06-DEC-08 Saturday 8:00 am to 9:45 am SPZ601

FIN254 => 05-DEC-08 Friday 8:00 am to 9:45 am SPZ601

Thanks.

A Q/A Session

I am a student of FIN 254. Section 10. I am having a problem with question no 9, chapter 8. How should I compute the last dividend that has 11% rate of return thereafter. Should I use the formula of zero growth rate? Then what is the amount in D (in the formula). Please help me out sir.

=> As mentioned in the problem, D0 is $3.50. You would need to use D6 to apply 11% rate of return. It is also mentioned that, dividends would grow by 5% forever. That means, D6=D0(1+g)^6.